From the June 2009 issue of Boomer Market Advisor • Subscribe!

June 1, 2009

Hedge funds now? Absolutely

We've heard about hedge funds and the global quantitative unwinding they've caused, but there are a lot of hedging strategies still available, which translates to hedge fund investing opportunity (yes, we're serious). But with all that's happened, a refresher is in order. We turn to alternative investment expert James Hedges, author of "Hedges on Hedge Funds" and our June 2007 cover subject, for help. For more on the subject, visit "The Art of Making Money" at www.boomermarketadvisor.com.

  • Evaluate your client's status as an accredited investor and determine the appropriate portfolio allocation to hedge funds.
  • Before jumping into the asset class, learn everything you can. There is a myriad of styles and strategies, and one size does not fit all.
  • Investigate the various hedge fund strategies before making a decision on how to invest in hedge funds.
  • Acknowledge that the concept of hedging implies a reduction of risk, not an increase of risk, which is an all-too-common assumption.
  • Decide if your client would be better off with a tailored hedge fund portfolio or an initial investment in a fund of hedge funds.
  • Pay close attention to the fees and other investment terms of the hedge fund managers.
  • Inquire whether managers have their own capital invested in the fund, which shows commitment and aligned interests.
  • Realize that hedge fund managers seek absolute returns, not returns that are relative to the broad market. Most of the returns from hedge funds result from the managers' skills rather than the returns of an asset class. Stop thinking just of the Dow or S&P 500.
  • Ask about the level of transparency and disclosure that will be provided by hedge fund managers - that is, how much information will be provided about fund activities.
  • Insist on thorough, expert due diligence on hedge fund managers before entrusting them with your client's money.
  • Remember, hedge fund investments have different tax reporting and implications from other investments. Align with an accountant before making an investment.
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